Blockheads

by Peter Koch

The city continues to abuse its community development block grant—HUD is fed up.

ILLUSTRATION BY: EMIL NOVAK

Standing inside one of the cushy lofts at the Granite Works on Main Street, it’s hard to believe that Buffalo has one of the highest poverty rates in the country, second only to Detroit. Maybe it’s the exposed-brick walls and 14-foot ceilings (they’re all the rage these days, you know), or perhaps the granite countertops, custom cabinets, and stainless steel appliances that make one feel miles from the bombed-out neighborhoods of the Fillmore District and the hard-luck streets of Black Rock. Rents here run from $895 a month to just shy of $2,000 for the sprawling whirlpool bathtub/gas fireplace models. Yes, sir, there’s no poverty in this development, to be sure.

That’s why it’s so strange that, through a roundabout method, the City of Buffalo used $6 million of its federal Community Development Block Grant (CDBG)—money set aside by the federal government to fight poverty and revive blighted neighborhoods—to subsidize this much-touted development and others like it. But that’s the latest news issuing forth from the local office of the Department of Housing and Urban Development (HUD). Officials there say that this and many other abuses in the city’s current HUD spending plan have lead them to what could be the most vigorous monitoring (that’s HUD-speak for what you and I would call an audit) of the city’s practices that they’ve ever conducted. Among those problems they’ve cited are spending millions on salaries, completing few low- and moderate-income (low-mod) houses, spreading the grants too thin, ignoring citizen input, and what appears to be laundering money out of grants for use in the city’s general budget.

Two months ago, the City of Buffalo submitted to HUD its 2008-09 Annual Action Plan, a dry, 500-page document that details how it plans to spend this year’s allocation of roughly $22 million in HUD funds. While that money comes to Buffalo in the form of several federal programs—HOME Investment Partnerships, Emergency Shelter Grants, Housing Opportunities for Persons with AIDs (HOPWA), and the American Dream Downpayment Initiative—the lion’s share of it comes in the form of loosely-regulated block grant money. It was while going over the city’s consolidated plan that Steve Banko and Nancy Peacock noticed block grant money being used to repay a mysterious $6 million Fannie Mae loan. It turns out that Buffalo created a “Livable Communities Fund” in 2006 using the line of credit from Fannie Mae. The fund, it was said, would address housing issues in distressed neighborhoods around the city.

According to HUD, though, all of the money went into market-rate housing, including $2 million for First Amherst Development’s Granite Works (846 Main Street) and $2 million for Schneider Development’s Warehouse Lofts (210 Ellicott Street).

The catch here is that in order to repay the $6 million with CDBG funds, the projects carried out with that money have to be eligible under that program. Unbelievably, the city tried to justify subsidizing these private projects by categorizing the payments under “Slum & Blight.” While it’s true that the old Seneca Paper factory on Ellicott and the former McDonnell & Sons granite works on Main Street were blighted, the beneficiaries of their rehabilitation are certainly not Buffalo’s low- and moderate-income populations. There have got to be better ways to fight poverty and blight than by giving wealthy developers huge subsidies on their private projects. But making adequate use of CDBG funds is an old problem at City Hall.

Spacious beauty and living promise

The block grant program is a product of Lyndon Johnson’s Great Society urban aid efforts. In order to fight poverty and clean up blighted neighborhoods, the federal government decided it would pour billions of dollars into state and local governments for local community development activities such as affordable housing, anti-poverty programs, and infrastructure development. There was a great deal of latitude in regards to spending the grant, as long as 70 percent of it was used for projects that benefit low- and moderate-income residents. At the outset of the program, Johnson optimistically said that it would help create “cities of spacious beauty and living promise.” The director of the Office of Economic Opportunity at the time, Sargent Shriver, predicted that the program would virtually eliminate poverty within a decade.

By and large, though, the program has failed miserably. Over the 33-year course of the program, HUD has dropped around $110 billion worth of CDBG funds into more than 1,100 municipalities, and there’s very little to show for it. The money financed public projects that didn’t pan out, invested in companies that couldn’t repay their loans, and funded human services agencies with little regard to the impact their were having on their communities.

And Buffalo has become what Banko, HUD’s Buffalo Field Office Director, would call a “poster child” for that failure. The Queen City has received, on paper, no less than $640 million in block grants. Good luck finding solid evidence of it, though. Instead of creating blocks of tangible progress (large-scale brick-and-mortar projects and concentrated economic development efforts), the city has traditionally employed the scattershot method of distributing its block grant. That includes using it to pay city employees, doling it out to dozens of local community-based housing and human service organizations and repaying risky loans.

According to a Buffalo News investigation in 2004, over the years $75 million went to as many as 70 unproven community-based organizations a year with little regard to their performance. A 2005 study by UB’s Center for Urban Studies revealed that, over a three-year period, 13 neighborhood housing organizations helped initiate an average of only about two mortgages or home-repair loans per month each, nearly half of which were for $5,000 or less. Yet the groups collectively received about $1 million in annual funding. Because the city funds these and other underperforming community groups every year, the money goes a little way in a lot of places. “What’s happening is they’re dividing the money up into very small chunks,” Banko told me. “So instead of having that block of ice in the glass chilling it, you have the little tiny pieces that dissolve faster.”

The national trend is to concentrate block grant funds in specific neighborhoods, which produces long-lasting, tangible results. Buffalo, however, has yet to embrace that concept.

Getting hard on soft costs

What bothers Banko and Peacock isn’t just that the city administers its block grants so poorly, it’s that it tries to be sneaky about it. One example is how the city uses block grants to pay city employees.

Block grants are broken down into three basic revenue streams that pay for administration, human services, and everything else. The amount of the overall grant that can go into the first two streams is regulated—up to 20 percent for administration (salaries) and up to 15 percent for human services. “You assume, then, that 65 percent of the grant is going to go out on the street,” Banko says.

Not so in Buffalo. In fact, under this year’s proposal, Buffalo will spend roughly 58 percent of its block grant money on what HUD officials call “soft costs”: salaries and debt repayment. And that doesn’t include salaries paid to human services agencies.

Though only 20 percent can be used on administrative salaries, other salaries are often charged under “program delivery.” Workers are needed to deliver programs. For example, in this year’s plan the city has included $300,000 for demolitions and $54,470 to pay someone to carry out the demolitions. It sounds harmless enough, but many of these people—whose salaries collectively add up to more than $7.5 million this year—are workaday city employees whose salaries ought to be included in the city budget. In other words, they’re leaning on the grants to plug their budget deficits.

The problem with paying salaries via block grant funds is that the employees you’re paying could stay on and eventually retire from the city. One can’t pay for those employees’ retirement benefits with block grant money for the obvious reason that they’re no longer administering or delivering any programs. “So what you’ve done,” says Peacock, Community Planning & Development Director at the local HUD office, “is mortgaged your city into the future, because somebody [else, presumably] is going to be paying their retirement benefits.”

Banko points to employees of BURA and BERC who started under the Griffin administration and, nigh on 30 years later, are still paying paid out of block grants.

The rest of the “soft costs” go to repaying the risky Section 108 loans and the Fannie Mae loan (which was presumably taken out to avoid more Section 108s). Section 108 is a program that allows block-grant communities to raise money for loans by floating HUD-backed notes. Nationwide, it has an astonishing 59 percent default rate. Since the beginning of the Griffin administration, Buffalo has issued 36 Section 108 loans, totaling $61.5 million. Thirteen of those loans (accounting for 61 percent of the money loaned out) defaulted, and unfortunately with 108s, the city assumes most of the risk. In the past, the city has funded very risky projects, ones that banks and other lending institutions turned down. When those projects fail, often there is no money to go after.

The Brown administration is not at fault for the Section 108 loans. In fact, it hasn’t taken out a single one, but has paid down about $4 million of debt incurred primarily by the Masiello administration.

Yet these “soft costs,” including repayment of the recent, and problematic, Fannie Mae loan, add up to almost 60 cents on the dollar that doesn’t make it out onto the street. By contrast, cities like Rochester spend less than 10 percent of their block grants on human services, and closer to 15 percent on administration. Still wondering why we’ve so little to show for hundreds of millions of dollars?

Taking ownership of its programs

Another situation that’s got HUD worried is the Buffalo Home Ownership Zone (HOZ). HUD started a competition in the mid 1990s called the Home Ownership Zone Initiative. The goal of the program was for cities to transform blighted areas by creating entirely new neighborhoods of mixed-income, single-family homes. To the surprise of many, Buffalo won a grant in the first year worth $5 million, and received an accompanying $7 million Section 108 loan. Buffalo drew up a home ownership zone that covered a good deal of the lower near East Side and proposed building 344 homes, 51 percent of which would be low-mod houses.

But the city had serious trouble getting the program off the ground, and the grant ran out a few years ago, with the city having only spent $3.5 million. That meant it had to return $1.5 million of free money to HUD.

With the grant finished, Section 108 loans spent, and far less than half of the homes built, HUD sent the city a paid technical assistance provider to help revive the program. HUD reduced the target number of homes to 218 and gave the city a two-year extension to complete them.

The program terminates on December 31 of this year. Still only 69 of 111 required low-mod homes and 82 of 107 market-rate homes have been built. If the city doesn’t meet those requirements, the unfinished houses will be pro-rated, and the city will be forced to pay money back to HUD once again.

According to Banko, the only planned new-builds in the Home Ownership Zone are the 20 market-rate and four low-mod houses currently being built at Sycamore Village, and 11 low-mod houses that are being planned for Kane Street. That means they need 32 more houses by the end of the year, 27 of them low-mods.

HUD can’t even guess where the money will come for them. “I’ve been in this position about five years,” Peacock says. “We are talking about the same thing with the HOZ as we were five years ago, when I sat in on the first meeting. They didn’t have a plan, they didn’t have a budget, they don’t seem to have a clue what the heck they’re doing with this.”

Playing hide-and-seek

In addition to soft costs, Banko and Peacock see other situations where the city tries to sneak around regulations and avoid accountability, or covers up information, prompting suspicion. With the Home Ownership Zone, for example, HUD just received a letter from the city asking if the houses need to be both built and sold. “They were hoping they just had to build them,” Peacock says. “They wrote ‘We are holding off building until we hear back from you.’”

Peacock responded with something to the effect of “All previous conditions apply. They have to be built and sold.” On the surface it seems like a harmless exchange. But the local HUD officials have dealt with the city before, and they recognize this as the city’s attempt to throw the onus back on HUD once the program fails. “They’ll want to say, ‘Oh, we didn’t hear back from the city in time,’” Banko says.

“What they’re hearing about the conditions today is the same thing they heard a year ago when they tried to circumvent this office by going to Washington, DC.”

Indeed, then-Director of the Office of Strategic Planning Tim Wanamaker flew to Washington, DC to plead with HUD officials for a better block grant appropriation for the city. When he arrived at the Capitol, HUD officials patched him through on a phone call to Nancy Peacock, not a mile from his own office back in Buffalo. “I don’t know what it cost the city to send Wanamaker to Washington to hear from Nancy,” Banko says, “but it was certainly more than it would’ve been to send him to Main Street.”

Another example: This December HUD requested information in regard to the Fannie Mae loan, which is subject to HUD regulations. “We gave them 30 days to respond,” Peacock says. Thirty days from the date, HUD received a letter from Director of Finance & Administration Carla Kosmerl (who has taken over many of Wanamaker’s duties) saying that she didn’t have the information on hand, and that the city required a 30-day extension. Peacock’s reply was essentially, “Nope, sorry. No 30-day extension. Please have all records available. We’ll be over there on Monday.”

When Peacock went to City Hall that Monday, Kosmerl was home sick.

“This is typical,” Banko says. “And that, I guess is the sad part. It’s kind of a game. They try to hide and we try to find them.”

Kosmerl, who’s been directing the city’s housing programs since Wanamaker left, is too busy to be effective. She wears the hats of three formerly full-time jobs, which is more than any one person could reasonably handle, let alone do well. In addition to running housing programs, she’s the Fair Housing Officer and, as stated before, the Director of Administration & Finance. Which is probably why she never returned my phone calls to comment.

HUD officials think that another game of hide-and-seek is going on with the newly proposed low-mod houses on Kane Street. The city is the builder for the 11 buildings (which it will pay for with HOME funds), but they’re charging themselves architectural fees, house planning board fees, application fees, and legal transfer fees. All of that adds up to $41,000. To HUD, it appears that the city is paying itself so it can use the money to pay a salary, in effect laundering the money from the HOME grant.

There are other problems. Citizen participation in the process is largely ignored. All the city’s consolidated plan says of the numerous public comments it received is, “All comments are taken into consideration in preparation of the plan. There were no comments that were not accepted.”

Accepted, yes. But implemented? There’s no evidence of it.

HUD often provides paid consultants to the city—technical assistance providers—to teach them how to apply for new programs and get new sources of money. The consultants keep quitting, though, because they say the city doesn’t want to learn; it just wants them to do all the work. (One such consultant was trying to help the city with an application for HUD’s Asset Control Area program, a program which Senator Chuck Schumer pushed the HUD secretary to bring to Buffalo.)

“Since the beginning of the block grant program in 1975, the City of Buffalo has received—in block grants alone—$640 million,” Peacock says, sounding a bit exasperated. “Where is it? Considering Buffalo is second in the nation in terms of poverty, the average citizen has to say, ‘Okay, how effective is it to address slum and blight in ways that result in $2,000-a-month apartments? Can your money be spent more effectively addressing issues on the East and West Sides?’”

Banko chirps in about the subsidized developments: “I don’t care about the need for them, and I don’t care about occupancy rates in these new buildings. The statutory requirement of HUD is to address the needs of low- and moderate-income people.”

Bad timing

All of these problems come at really bad time. CDBG funds are becoming less and less popular nationally, for the simple reason that they’ve proven largely ineffective. In 2005, the Bush administration pushed to cut and reform it. The Office of Management and Budget (OMB) recommended cutting billions and sending what was left to the Commerce Department. The OMB was demanding that projects receiving funds demonstrate their effectiveness using traditional measures such as increases in jobs, declines in neighborhood crime, and gains in property values. It wanted cities to compete with one another to win such aid, rather than receiving funds each year based on a preordained formula.

That push didn’t pass Congress, but now there’s an $866 million reduction on the table for the 2009-10 fiscal year. That number corresponds directly to the OMB report about the ineffectiveness of the block grant.

“They’re looking for a full overhaul at best,” says Banko. “They said that they need an improvement in clarifying the purposes of the program, and how localities are targeting funds and developing performance measures. If you’re the local administrator of the block grant, how do you explain that you spent $4 million supposedly on slum and blight, but which resulted in the direct subsidy of markiet rate units? Especially when you have vast wastelands in virtually every neighborhood in the city.”

Come June, the local HUD office will begin monitoring the city…again. They will most certainly catch the city abusing its federal dollars—overspending in certain areas, putting money into projects where it has no business, and giving thousands to broken organizations—and will ask for them back. It’s happened many times before.

And it’s like Banko says: HUD will get its money back; it always does. It’s the poor people who are supposed to benefit from these funds who will suffer.